So you’ve found the perfect house, you’ve negotiated purchase terms, you’re all set for inspections, and there’s nothing else standing between you and the closing table — or is there?
Even if you’re feeling comfortable with the asking price of your intended new home, your mortgage lender needs to make sure that you aren’t overpaying for a house that isn’t really worth what they’re about to give you. That means it’s time for an appraisal.
“When buyers finally decide on the right house, they’ve already seen a few homes,” says top Albuquerque real estate agent Tracy Venturi.
“In their mind, they go, ‘Wow, this is priced similarly in the range that I’m looking at, and this one is the clear gem for us.’”
In her 20 years of experience helping buyers find the perfect home, Venturi has seen her fair share of appraisal reports. Unless a buyer is paying cash in full, one of the most important components of any mortgage-contingent purchase agreement is the appraisal.
What exactly is a certified appraiser looking for, though?
With the help of Venturi and Rodman Schley, MAI, SRA, President of the Appraisal Institute, we’re spelling out 23 factors that influence your soon-to-be new home’s value.
What does an appraiser look for?
Schley explains that an appraisal report usually involves a description of the property, details about its location, an analysis of use, a review of nearby similar properties, and, finally, information regarding local real estate trends.
We’ll elaborate on those specifics shortly, but now is a good time to clear up a common misconception: An appraiser is not walking into a home without any details about the pending purchase.
“One of the things a lot of people don’t know is that the appraiser gets a copy of the contract,” shares Venturi. “They’re not trying to sabotage the deal; they’re just trying to make sure it makes sense for the buyer, the seller, and the lender.”
It may be helpful to think of an appraiser as a neutral fourth party. They’re going to assess the property according to standardized criteria, and then produce an honest report based on facts and observations.
“Mortgage appraisals are not technically provided to confirm a sales price,” says Schley, noting that the purpose of an appraisal is primarily to make sure that neither the buyer nor the lender are about to enter into questionable financial agreement.
Now that we’re all on the same page, let’s get down to business on what an appraiser is looking at in order to produce their report.
The appraisal process begins with a big-picture overview.
- Type of neighborhood. Is the home in an urban, suburban, or rural location?
- Neighborhood growth. Is the area growing in size? Is there steady demand for homes?
- Neighborhood land use. An appraiser evaluates how the property is being used, be it residential or commercial, and whether it’s a single- or multi-use unit (for example, is there a retail space on the ground floor and an apartment above? Is the building a mix of office and residential units?)
- Housing trends. In short, what’s going on in the area? Appraisers will take note of whether residents are renting, buying, renovating, what types of new properties are being built, and so on.
Here’s where things get personal about the home in question.
- Type of house. This can refer to a single-family home, a townhouse, a unit in a condominium complex, a mixed-use space, or something else entirely.
- Design and style. An appraiser will consider the architectural style of the home. Think modern, ranch, craftsman, colonial, mid-century, and so on.
- Build year. The age of a home can influence value, particularly if it’s newly constructed or historic.
- Construction materials. Here’s where the appraiser notes everything from siding (brick, vinyl, concrete, composite…) to flooring (hardwood, title, carpet, laminate…), to trim and wainscoting (wood, plastic, metal…).
- Square footage. How large is the home?
- Number of bedrooms. These will be counted in accordance with state regulations on what defines a bedroom.
- Number of bathrooms. Full baths and half baths both earn credit.
- Foundation type. Appraisers look at whether a home is on a slab, has a crawl space, or a full basement.
- Basement details. If the home does have a basement, an appraiser will take into account whether the space is finished or is closer to something out of a horror movie.
- Attic details. Likewise, if the home has an attic, the appraiser will evaluate the size and condition of the space.
- HVAC details. How is the home heated and cooled? How old is the system?
- Car storage. This refers to proper parking areas, not how many vehicles could theoretically fit on the front lawn. Garages (attached or detached), carports, and driveway will be evaluated — as well as the driveway surface type (pavement, gravel, dirt, and so on).
- Appliances. An appraiser will take note of present appliances, which may include: refrigerator, stove, oven, dishwasher, washer and dryer, and others.
- Features and amenities. What “extras” does the home have? This is where the appraiser looks for things like fireplaces, outdoor spaces (porches, patios, balconies), fences, pools, extensive landscaping, detached buildings for storage or workspace, and more.
Let’s clarify another common misunderstanding: An appraisal is not the same thing as a home inspection.
“They’re two different animals,” says Venturi. “A lot of times, [buyers] think that the appraiser is going in and checking all the functionality of things, when really they’re looking at the big picture.”
For a full report on the nitty gritty details of a property’s condition, performance, and areas of concern, a home inspection is vital; don’t expect to further negotiate a flooring allowance or electrical repair based on an appraisal report.
That said, an appraiser will take a look at the following:
- Repair needs. Again, this won’t be a deep-dive into what is wrong, but if an appraiser sees a clear need for repairs, they’ll note the deficiencies. This could mean anything from a deteriorating door frame to a cracked toilet tank.
- Renovation. Appraisers will take into consideration updates that have been made to the property. Similarly, if a house built in 1976 is still sporting its original kitchen, that won’t go unnoticed.
- Major damage. This is where an appraiser will check for expensive problems with the home. Issues like water damage, electrical hazards, pest infestations, and other safety or financial hazards.
- Livability. Many homes are listed on the market as “move-in ready,” implying that the next buyer can move in without first having to make repairs or major updates. An appraiser will observe the home for any issues that may affect comfort and safety.
- Neighborhood conformity. This isn’t to say a home will be penalized for having a bright pink front door — to each their own — but appraisers will compare the house against its neighbors in terms of style, condition, construction, use, and utility.
Determining value with comparables
Aside from using the sales contract as a starting point for their valuation, once an appraiser has reviewed a home and the neighborhood, it’s time for comparative research.
Appraisers look at recently sold nearby homes that are similar to the one in question. Frequently referred to as “comps,” comparable properties are a key aspect of most real estate transactions.
Agents use comps to help sellers determine a listing price, appraisers use comps to help confirm market value, and prospective buyers often take comps into account without even realizing it. If you’ve ever said something along the lines of, “This one is nice, but the house two streets over is the same price and has a three-car garage,” then you’ve considered comps!
For more formal purposes, comps are chosen based on:
- Year built
- Square footage
- Number of bedrooms and bathrooms
- Bells and whistles (such as a pool, renovated kitchen, hardwood flooring; anything that can be considered an upgrade or desirable attribute)
The date of the last sale is also important. The most accurate comparables tend to be recent and nearby sales — ideally within the last few months and within a mile or two of the home in question — but depending on location and market conditions, appraisers may have to be flexible with their search parameters.
“Not every neighborhood is cookie-cutter,” explains Venturi. “Sometimes [appraisers] have to deviate and go back a year, or five miles, or across town; but they’re looking backwards to find similar properties to justify the current value of the house.”
What buyers should know about appraisals
To ensure the appraisal is truly an independent opinion, the lender will order an appraisal from an appraisal management company or from their approved list of independent appraisers, and the buyer will later pay for it as part of the closing process.
If you want to be more involved, don’t be shy about asking your lender their appraiser independence protocols and how they go about ordering an appraisal. A trustworthy appraiser will be professionally designated by a formal appraisal organization — such as the Appraisal Institute — and as long as your lender’s policies permit, you can actually be present during the appraiser’s inspection.
“Appraisers welcome information,” says Schley. He encourages buyers to check with their lender and attend the appraisal appointment if possible. Once on site, feel free to observe the process and speak up if you have additional information that may be pertinent to the appraiser’s reporting; and be sure that enough time is spent evaluating the home’s assets and upgrades.
In short, don’t be afraid to get involved. After all, you’re the one taking out a mortgage to purchase the home — it’s perfectly fine to double-check credentials and make sure there are no oversights.
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